The Bank of England is moving towards the most significant relaxation of regulations on lenders since the 2008 financial crisis. The Financial Policy Committee of the Bank proposed a reduction in the required reserves that banks must hold to safeguard against potential collapse. The aim is to encourage banks to enhance lending to individuals and businesses, thereby stimulating economic growth.
However, the Bank of England also expressed concerns about a potential sharp decline in the value of predominantly US-based tech companies, highlighting worries about a possible bubble in artificial intelligence. Additionally, the Bank noted that UK stock prices are currently at their highest levels since the global financial crisis of 2008. Despite growing unease in the stock market, Bank Governor Andrew Bailey defended the decision to ease capital regulations.
During a press conference, Mr. Bailey emphasized the resilience of the banking system in the face of substantial economic shocks in recent years. He stated that the current approach was reasonable and sensible given the circumstances. He dismissed suggestions that the Bank was setting the stage for another financial crisis, asserting that the regulatory system was well-equipped to handle the changes.
Mr. Bailey clarified that it was not within the Bank’s purview to dictate how banks utilized the freed-up capital. He highlighted the importance of a mutually beneficial relationship, where increased lending by banks could strengthen the economy and benefit the banks through improved returns.
Under the new proposals, the capital requirements for banks would be reduced from approximately 14% to 13% of their risk-weighted assets. This adjustment aims to lower the amount that banks need to reserve as a protection against risky lending and investments to mitigate potential losses.
A recent review by the Financial Policy Committee found that UK banks now carry less risk on their balance sheets compared to early 2016. The Committee affirmed that the banking system in the UK is robust and capable of supporting households and businesses even in adverse economic conditions.
Commenting on the stress test results, Russ Mould, investment director at AJ Bell, praised the resilience of the UK banking sector. He noted that lessons learned from the 2008 financial crisis had led to stronger banks better equipped to weather economic downturns. The stress test results indicate that major UK banks are prepared to withstand severe economic challenges and continue to provide vital support to consumers and businesses.
While acknowledging increased threats to financial stability this year, the Financial Policy Committee highlighted the Bank’s confidence in cutting the capital requirements for banks. This move is expected to be welcomed by the government as it aligns with efforts to stimulate economic growth by encouraging more lending.